Mentor Graphics Corp (NASDAQ:MENT)

The Company is a supplier of electronic design automation systems, advanced computer software, emulation systems and intellectual property designs and databases used to automate the design, analysis and testing of electronic hardware and embedded systems

We are adding Mentor Graphics (NASDAQ: MENT) to our Marketocracy Barnacle Defensive Growth Portfolio. It finally gives us something for our Mid-Cap space, though Morningstar classifies it as Small Cap Core. Based on market capitalization, though, we feel more comfortable calling a mid-cap stock.

Headquartered in Oregon, Mentor Graphics enables, “companies to develop better electronic products faster and more cost-effectively. Our innovative products and solutions help engineers conquer design challenges in the increasingly complex worlds of board and chip design.” To keep it simple, Mentor helps companies to be more efficient through electronic design automation and other technological efficiencies.

For a stock to qualify for the Defensive Growth Portfolio, the company must have reasonable debt, liquidity, positive free cash flow, positive earnings and sales growth, pay a dividend, and reasonable valuations.

Why we like Mentor Graphics:

P/E is 17, which is well below historical averages

Debt/Equity is 0.20, which brings into Bullet Proof territory

Currently, the dividend yield is 0.90%. While small, the company feels comfortable enough in its earnings to return value to its shareholders

The Quick Ratio and Current Ratio are 1.90 and 2.00 respectively, adding to its financial safety.

Free cash flow is $119 millionFor the last five years, revenue has grown 7.94% and earnings have grown 27%. The return on equity is a reasonable 12.99%

Price to sales and price to book are each around 2.0Net margins are currently sitting at 13% and gross margins are 87%

As we measure it, the stock has a conservative target price of $23. With the new dividend payments, this gives the stock a margin of safety over 6%. While we would like something stronger, we feel the stock has the potential for more shareholder return with the improving margins, and increased revenue growth from the 2008 recovery.

There are always potential risks to investing, and Mentor is no different. During the downturn, it took things harder than most, and any economic troubles will be magnified in this business, yet that is we focus on allocation and diversification.

This is what others are saying about Mentor Graphics:

Motley Fool Community (2 stars out of 5)

Zacks.com (Hold)

MSN Money (8 out of 10)

Thompson Reuters (Neutral)

Market Edge (Neutral from Avoid)

Happy investing!

The information contained on this site is for informational purposes only and should not be considered as investment advice or as a recommendation of any particular strategy or investment product. This profile should not be considered as a solicitation for investment services. At this point and time, neither I nor my family have a position in the security discussed.

Though the company is making strides in the aerospace and automotive industries, it's still heavily tied to the ups and downs of the semiconductor market. At best I think this company is a market performer, but the reason for my thumbs down here is management. Both the CEO and CFO have presided over a company that has gone nowhere in terms of market value for nearly 20 years. They own around 1% of the outstanding stock, but have instituted a poison pill provision that pays them nearly $25 million in the event of a change in control, or if an outside party acquires 40% of the stock or is successful in electing indepedent, non-incumbent members to the board. Shameful. Strong underperform.

MENT is coming off a good year with continued growth. They continue to slowly increase market share in a traditionally slow growth industry. They have a number of leading edge products and technologies that allow them to take business away from competitors, and this trend should continue.